The IMF is expected to launch a new facility soon that will commit developing countries to improving economic performance, while also providing emerging market investors with a clearer picture of what is going on individual countries.
The Policy Support Instrument (PSI) is fresh off the drawing board and will be discussed by the IMF's policy-making International Monetary and Finance Committee (IMFC) today.
Emerging market countries are already able to receive IMF surveillance of their economies, but they are not bound to carry out reforms suggested by the Fund. Nor does normal surveillance provide capital markets with a clear indication of whether those reforms are being made. The PSI should provide a much more 'transparent' picture, IMF officials say.
The PSI will allow the IMF to give 'very close advice to governments to anchor their macroeconomic policies and reform policies, and [will also] give very accurate and up to date signaling to investors and to possible donors regarding those countries,' Managing Director Rodrigo de Rato said at a briefing. The Fund's executive board is expected to approve the new facility quite soon, he indicated.
Nigeria and other low-income countries are expected to provide test cases for the PSI but, if there is demand, the scheme could also be extended to middle-income countries in Asia, Latin America and elsewhere, IMF sources told Emerging Markets. One large middle income country in Asia is understood to have expressed interest already.
With increasing numbers of emerging market countries graduating from IMF to capital market financing, and some walking away because they do not like the Fund's lending conditionality, the PSI may provide a way of making the Fund relevant to emerging markets in general.
Although the instrument is not automatically linked to provision of IMF lending, it does 'lock in' the country to making specific reforms, an IMF official added.